One piece of seemingly significant recent economic news was the report from Standard & Poor's downgrading the debt of France, Austria, Italy and Spain, as well as five smaller European nations, in response to the much-chronicled fiscal woes Europe is facing. Italy and Spain actually had their credit rating docked two notches, which should theoretically mean that they have to pay more interest to get investors to buy their debt. But since the day of the downgrade, the yield on 10-year Italian bonds has dropped from 6.64 percent to 6.34 percent.
The same thing happened when S&P downgraded the United States' creditworthiness last August. At the time, the U.S. was paying 2.56 percent interest on its 10-year Treasury bonds; since then, it's dropped to around 2 percent. In the same time frame, the S&P 500 stock index has gained 9 percent.
This isn't a new phenomenon. Back in 1998, Japan was downgraded by Moody's, and Japanese stocks gained 26 percent over the following year. Canada was downgraded in 1992, and Canadian stocks then gained 30 percent over the following year. That doesn't mean credit downgrades are meaningless, but it does suggest that you shouldn't necessarily expect to see their effects in the markets.
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